Coming pension war makes election battle look tame

It’s a taxpayer divide. That’s the takeaway since the tape was leaked of Mitt Romney referring to the 47 percent of citizens who don’t pay income taxes.

The Republican presidential candidate described a large political gap between those who pay the tax and those who don’t, and those who wouldn’t vote for him, “no matter what.” This line was perceived as cold, and his campaign has been apologizing ever since.

But the fuss obscures a reality. The tax gap isn’t the deepest divide in America. The deepest gap is the pension divide, between those few who have a guaranteed cushion in the form of defined-benefit pensions, which promise a fixed annuity at retirement, and those who don’t. How the candidates address this divide, cultural as well as political, is crucial, far beyond November.

To understand the current mindset, it helps to consider the pension culture of the past. Back in the early 1980s, many companies, as well as governments, offered employees a defined-pension benefit when they retired. Thirty years ago, about 62 percent of American workers were covered by some kind of plan like this.

However, pension returns themselves looked modest relative to the incredible interest rates offered in the money market. But federal law prevented workers in private plans from pouring their pension money into tax-deferred vehicles. A defined-benefit pension felt like a prison.

The power of this sentiment becomes clear when you recall what happened in January 1982, when lawmakers opened what seemed, at the time, a small window in that prison. The law changed so that private-pension employees might place cash in tax-deferred vehicles for retirement.

In short, Americans busted right through that window and made it a big door to a new heaven, that of defined-contribution pensions you managed yourself. In January 1982, the 18-month fixed rate at Chemical Bank was 14.25 percent on a minimum investment of $250. It was no surprise that 401(k) plans and IRAs grew quickly. “Heck, we are just diversifying,” the new investors told themselves. After all, they did have a fallback: the sure annuity of the government’s Social Security.

Of course, some chose jobs with old-fashioned annuity pensions, such as teacher or fireman. But the defined- contribution crowd took the steady-as-you-go crowd for fools. Money rates were never as high again. As it happened, 1982 also marked the beginning of the great stock-market rally, and the defined-contribution crowd eventually shifted blithely to equities.

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